From a simple, practical perspective, earning interest on your crypto is easy. You go to a project that offers interest, you deposit or “stake” your crypto, then you sit back and count the money as it comes in. Some may have a “lock in” period, requiring you to leave your crypto with them for a minimum time, or may pay interest only monthly or quarterly, or have other restrictions, so it may pay to shop around, but the basic process is quite simple.
What Generates the Money to Pay Interest?
However, in the light of the events of 2022, people are increasingly interested in how that works from the interest payer’s perspective. How do platforms pay interest on crypto deposits? Where does the money come from? These are questions prompted by events over the last year, but in many respects, they are versions of something that people underestimated, or often just didn’t get at all, about the nature of crypto.
Even as recently as a few years ago, the objection that those of us already no potential to earn interest. The “no inherent value” thing was always a questionable argument, but it has been completely disproven over the last few years, at least in the sense that it relates to interest. Bitcoin, ether, and other cryptocurrencies have value because they are in demand, and that demand extends to demand for loans. When there is loan demand, there is the potential to charge interest on loans, and when you can charge interest on loans, you can pay interest on deposits.
Interest Earned versus Interest Paid
When you hold fiat deposits in a savings account at a bank or other financial institution, you get rewarded by being paid interest, and the money to pay that interest is basically generated the same way. The bank takes your deposited money, then lends it out to individuals and businesses. They charge them interest on the loan and pay you interest for essentially facilitating that loan by depositing money at the bank. The spread between the rate charged for a loan and that paid on a deposit covers the bank’s costs and generates a profit for them. Crypto lenders do exactly the same but, for some reason, some people will try and tell you that while one is perfectly normal and safe, the other is inherently risky and unsustainable.
What Caused Problems in 2022?
Still, there were problems in 2022 with some companies that offered interest on crypto. So, if the process is the same as that at a bank dealing in fiat currencies, what caused those problems? Each case was different, of course, but primarily it was because some companies, in an attempt to outdo their competition, started to offer extremely high interest rates on staked crypto. If you offer ten, fifteen percent or more interest on crypto but charge only five or six percent on loans, as these companies were doing, the extra money has to come from somewhere. In these cases, it came from high-risk, leveraged trading that produced great returns when they got it right, but big losses when things went wrong. And once they did go wrong, depositors were in danger of not getting their staked crypto back.
What to Look For
When you are thinking of staking crypto to earn interest, the first thing to look for is sustainable payouts. This is one situation where the highest payouts aren’t necessarily the best. Lower interest may not be sexy, but it doesn’t help you to get fifteen percent per year interest if your stake is basically lost after six months. Interest payouts at rates lower than prevailing loan interest rates make that scenario far less likely, and you can still often earn more by staking crypto than you would get for depositing fiat currency in a bank.
How it Works at SmartFi
We may be a little biased, but we actually believe that SmartFi is one of the easiest places to get passive income from your crypto. For starters, funding your account at SmartFi is both fast and easy, with ACH and wire transfer options now complemented by fiat onboarding via Visa and Mastercard, and even Apple Pay. We have also worked to make KYC as quick and painless as possible and have some of the fastest turnarounds in the business.
Once you have funded your account, whether directly with BTC or ETH or via a fiat deposit, Smart Interest is readily available, and you can even estimate how much interest you can earn by using the Smart Interest Calculator. Then it is just a matter of registering, and you start earning straight away, with no lock in period and compounded interest paid weekly.
See what we mean? Easy, right?
Conclusions
Most people elect to stake only a portion of their crypto, especially in the risk-averse atmosphere that follows a year of turmoil in the crypto industry, but even so, you might be surprised at what you can earn from even quite conservative, relatively safe lenders who will pay you interest.
Assuming that you use a platform like ours that has no lock-in and offers sustainable rates, that makes it worth checking out interest on crypto, however much you may hold and for however long you intend to hold it.
.png)
